E.U. Banking Watchdog Warns of Legal Breach by Bulgaria

LONDON — The European Union’s banking watchdog has warned that Bulgaria’s authorities have breached European law by continuing to block depositors’ access to their money at a large troubled lender the government seized four months ago.

The warning comes after a run on deposits forced the lender, Corporate Commercial Bank, to close in June, leaving tens of thousands of consumers and businesses without access to their cash in the European Union’s poorest member state. On Monday evening, the European Banking Authority, based in London, urged the Bulgarian authorities to provide access to more than half of the deposits — about $2.4 billion, which are insured by the state under European Union law.

In the meantime, a group of bondholders, including investors in the United States and Europe, is also considering suing the Bulgarian government. The bank, known by its Bulgarian initials, K.T.B., defaulted on $150 million in bonds in August.

The group “will initiate legal action against the Bulgarian government and individual members of the leadership in the coming weeks, claiming discriminatory treatment and breach of relevant Bulgarian and E.U. laws,” an American bondholder, who is in the group and spoke only on the condition of anonymity because of continuing negotiations with the government, said in an interview.

The central bank has said that a decision on the future of K.T.B. would be made by Nov. 20 at the latest, pending the results of an audit, as officials continue to wrangle over whether the state should bail out the bank or find private investors in the hope of saving it. The audit results are expected this week. If they show K.T.B. to be insolvent, the central bank could revoke its license and seek its bankruptcy.

The Bulgarian finance ministry on Tuesday referred requests for comment to the central bank. The central bank did not respond to those requests.

It was after the bank run, prompted by news reports of dubious deals by its main shareholder, that the Bulgarian central bank seized control of the lender and suspended all of its operations. But according to a statement by the European Banking Authority, the central bank is breaking European Union law “by removing access by protected depositors to their protected deposits.”

Depositors have staged near-weekly protests in front of the central bank in the capital, Sofia, since August, demanding that the authorities reopen K.T.B. The bank, Bulgaria’s fourth-largest, has $4 billion in deposits held by consumers as well as by companies, hospitals, municipalities and schools.

Trade and employer unions have warned that the uncertainty surrounding the bank could threaten hundreds of thousands of jobs in Bulgaria, a country of 7.3 million.

The fallout from the banking crisis has so far been limited to Bulgaria. The country’s foreign-owned banks, which account for about 70 percent of the market and include UniCredit of Italy and Raiffeisen Bank International of Austria, have not been affected.

According to the European Banking Authority, depositors should have been compensated within 25 days after their accounts became unavailable. The state guarantees up to 100,000 euros, or $128,000, a depositor. The rest of the money at K.T.B., which amounts to about $1.6 billion, is not insured by the state.

The European Commission, the administrative arm of the European Union, opened its own proceedings against Bulgaria in September, demanding compensation for K.T.B. depositors. If Bulgaria does not comply with the commission’s request, it could be taken to the European Court of Justice, which would have the power to fine the country and force it to comply with European rules.

An earlier effort to rescue K.T.B. with state funds was abandoned after the Bulgarian government resigned in the summer, before parliamentary elections held early this month. That vote produced a highly fragmented Parliament, leaving parties in Sofia still struggling to form a cabinet.

K.T.B. was forced to close on June 20 after customers withdrew more than a fifth of deposits in a weeklong bank run. A preliminary audit by the central bank revealed outsize exposure to companies linked to its biggest shareholder, Tsvetan Vassilev, and missing documentation for more than two-thirds of the bank’s loans. Mr. Vassilev has denied any wrongdoing and blamed business rivals working in collusion with state officials and prosecutors for the turmoil at the bank.

On Aug. 12, Bulgarian prosecutors charged Mr. Vassilev with embezzling about $140 million from the bank during the last three years. Interpol, the international police agency, issued an arrest warrant for him.

A month later, Mr. Vassilev resurfaced in neighboring Serbia and surrendered to the police. He is in Belgrade, the capital, awaiting a court ruling on an extradition request by Bulgaria.